Q:
My sole trader business creates and builds new longcase clocks, the vast majority of which are sold directly to buyers in the England and the EEC.
Last year I decided to set up a separate business selling clock mechanisms to self builders. All of the mechanisms are purchased in Germany and I am currently paying German rate of 19% vat on those products. About half of my sales are to Canada and the USA – can I register for VAT on this part of my activities (without incuring VAT on my Clock making) – the advantage would be that I could presumably export to None EEC countries, VAT free.
A:
Hi Frank
I assume that the reason you want to register the export part of the business is to enable you to purchase the mechanisms free from German VAT?
There are a lot of issues involved here and I’d suggest that you discuss this in detail with your accountant before deciding how to proceed as I can only explain the main principles here.
First of all, where VAT is concerned it is the “person” who is registered for VAT, not the activity. You mention that you’ve set up the export part of the business as a “separate business” – do you mean that you’ve set this up as a limited company or separate partnership?
If all of your business activities are currently carried out by yourself as a sole proprietor (or any other legal entity), then registering for VAT will cover all of your activities, not just the export activities. This means you’d have to charge UK VAT on UK sales, although of course you’d be able to offset this against the VAT that you pay on your other purchases and expenses.
Second, there are rules against splitting up business activities to avoid VAT registration or paying VAT on certain business activities. These normally apply where the owners collectively – such as yourself as a sole proprietor and your limited company/partnership – would be registered or liable to register for VAT because your turnover exceeds the VAT registration limit (currently £68,000).
So if your total turnover from all of your sales – UK, EC and non-EC sales – is £50,000 per annum, then you should be able to hive off the non-EC business into a separate company/partnership and register that entity for VAT without affecting the rest of your business. However if and when the total turnover of all your business activities exceeds the registration limit and you don’t pay VAT on your UK sales because these are carried out by a separate entity, then HMRC can require you to pay VAT on all of your income.
HMRC do regard this type of arrangement as avoidance and strongly recommend that you take some proper advice about how to proceed. Their VAT Leaflet “Should I be Registered for VAT” explains the rules in further detail and you should look at section 13 which contains their statement of practice about the subject, here’s the link to the leaflet: http://tinyurl.com/yzqxqq4.
Marie